Seller and Buyer conclude a sales contract, with method of payment usually by letter of credit (documentary credit).


Buyer applies to his issuing bank, usually in Buyer's country, for letter of credit in favor of Seller (beneficiary).


Issuing bank requests another bank, usually a correspondent bank in Seller's country, to advise, and usually to confirm, the credit.


Advising bank, usually in Seller's country, forwards letter of credit to Seller informing about the terms and conditions of credit.


If credit terms and conditions conform to sales contract, Seller prepares goods and documentation, and arranges delivery of goods to carrier.


Seller presents documents evidencing the shipment and draft (bill of exchange) to paying, accepting or negotiating bank named in the credit (the advising bank usually), or any bank willing to negotiate under the terms of credit.


Bank examines the documents and draft for compliance with credit terms. If complied with, bank will pay, accept or negotiate.


Bank, if other than the issuing bank, sends the documents and draft to the issuing bank.


Bank examines the documents and draft for compliance with credit terms. If complied with, Seller's draft is honored.


Documents release to Buyer after payment, or on other terms agreed between the bank and Buyer.


Buyer surrenders bill of lading to carrier (in case of ocean freight) in exchange for the goods or the delivery order.


   The Incoterms (International Commercial Terms) is a universally recognized set of trade terms brought out by the International Chamber of Commerce (ICC) in Paris.


They clearly define the buyer and seller’s trade contract liabilities and are considered to be a cost-saving tool.


Incoterms are used throughout the world and are accepted by banks, customs authorities, all types of carriers, transportation intermediaries and financial institutions.


The Incoterms were first published in 1936 and have been regularly updated following the changes in the international trade needs, till their latest version in 2002. The International trade terms are grouped in four categories: E, F, C and D, each one indicated by the first letter of the acronym.

Below is a list of the most common Incoterms:


EX- WORKS (From factory or warehouse):


The term EXW is commonly used between the manufacturer/ seller and export-trader/ buyer, and is considered to be the minimum obligation of the seller among all other Incoterms. Under EXW, the seller is not even responsible for the cost of loading the goods on the vehicle provided by the buyer, unless otherwise agreed in advance. Therefore, the buyer has to bear the full cost and the potential risks involved in bringing the goods from the EXW location to the ultimate destination.


FCA (Free Carrier):


In Free Carrier, the seller/ exporter/ manufacturer clears the goods for export and then delivers them to the carrier specified by the buyer at the “named place”. If the named place is the seller’s factory, the seller will be in charge of loading the goods onto the transport vehicle. If the named place is any other location, the seller will not be responsible for the transportation of goods.

P.S: A carrier can be a shipping line, an airline, a trucking firm, a railway or sometimes a freight forwarder.


FAS (Free Alongside Ship):


Under this term, the seller clears the goods for export then places them alongside the vessel at the “named port of shipment”. The buyer will be responsible for the loading fee, the main carriage, the cargo insurance and other costs implicated.

Letters of credit can also be used in the payment terms of FAS transactions.


FOB (Free On Board):


In Free On Board, the seller clears the goods for export, takes charge of the costs and risks involved and delivers the goods on board the vessel. This term is used only for ocean or inland waterway transport.

Once the cargo has crossed the “ship’s rail”, the buyer bears all costs and risks.

The main difference between FAS and FOB is that under FAS term, the buyer is required to clear the goods for export and pay the cost of loading them.


CFR (Cost and Freight):


Under CFR, the seller clears the goods for export and is responsible for delivering the goods past the ship’s rail at the port of shipment. He also takes charge of the costs associated with transport of the cargo to the named port of discharge.

However, once the goods pass the ship’s rail at the port of shipment, the buyer assumes responsibility for risk of loss or damage, as well as any additional transport costs.


CIF (Cost, Insurance and Freight):


CIF and CFR are similar with one difference: the seller is also responsible for procuring and paying marine insurance in the buyer’s name for the shipment. The buyer or importer will be responsible for the import customs clearance and other costs and risks.


DDP (Delivered Duty Paid):


The seller clears the goods and makes them available to the buyer at the named place of destination, cleared for import but nor unloaded from the transport vehicle.

The exporter assumes therefore all responsibilities for delivering goods, including important clearance, duties and other costs payable upon import.


DDU (Delivered Duty Unpaid):


The seller also clears the goods for export and makes them available to the buyer at the destination place. However, cargo remains uncleared for import. The buyer bears the import customs clearance, duties, administrative charges and any other costs upon import as well as the transport to the final destination.


The above-defined terms are a brief summary of the Chamber of Commerce Incoterms in their latest publication.

There are some other terms issued by the ICC but they are not as frequently used as the ones just mentioned. These terms are:


-         CPT (Carriage Paid To)

-         CIP (Carriage and Insurance Paid To)

-         DAF (Delivered At Frontier)

-         DES (Delivered Ex Ship)

-         DEQ (Delivered Ex Quay)